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Trust and Vulnerability

Author

Listed:
  • Christopher Bidner

    (School of Economics, The University of New South Wales)

  • Ken Jackson

    (Department of Economics, Wilfried Laurier University)

Abstract

By facilitating mutually beneficial transactions, trust is a crucial ingredient for economic development. We explore the determinants of trust by studying a model in which agents rely on imperfectly enforceable contracts to support cooperation in a prisoners’ dilemma production game. We show how a fundamental relationship between vulnerability and trust emerges when players observe private signals of the strength of contract enforceability, even in the limit as signal noise vanishes. In uncovering this relationship, the model demonstrates the importance of social institutions in the development process. We show stronger social institutions, by reducing vulnerability, increase equilibrium trust, promote the use of superior technologies, and interact with formal legal institutions.

Suggested Citation

  • Christopher Bidner & Ken Jackson, 2011. "Trust and Vulnerability," Discussion Papers 2012-09, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2012-09
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-09.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    trust; global games; institutions; social protection.;
    All these keywords.

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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